Exploring 85 Years of Standards Setting

The parallels between the CPA profession 85 years ago and today are substantial, as are the parallels to our emergence from the Great Depression and the recent Great Recession. Today's hottest accounting issues are revenue recognition and lease accounting, showing that arguably little has changed from the 1930s. Fortune magazine wrote about CPAs that “ten different accountants may, after working upon the books of one company, draw up ten slightly different balance sheets (June 1932, p. 96).” Do we still lack an agreed-upon definition of how to recognize revenue, or consensus on where to put lease obligations on the balance sheet?

One might argue that the world was much simpler in the 1930s. Former Yale economics professor Roger Ibbotson, however, expressed strong concern about complexity in the 1930s, and even used the term “information overload” for the substantial amount of financial information disseminated at that time. Fortune, in 1932, referred to how “the CPA profession is constantly trying to adopt accounting procedure and philosophy to a chaotic, changing business world.” Fast forward to today, where we still have not agreed on basic accounting principles, but now look towards even newer conventions such as “ clarity projects,” “simplicity,” and “ convergence,” which might actually add hundreds of pages of text and overlapping taxonomies to an already obscured, complicated, and diverged set of standards.

Our Regulatory Structure 85 Years Later

This year's coming issues will explore our current regulatory structure. To some, it is an array of multiple, arguably duplicative, overlapping oversight and regulatory boards that did not exist 85 years ago. Has this added clarity or confusion to the accounting environment? As either principles- or rules-based professionals, are we more vulnerable to enforcers who are legally trained in a statutory and case-based environment? You, our readers, will weigh in on this subject over the next 12 months. We will also look at the new definitions of common accounting terms that are already being introduced by our standards setters. Does this add to or reduce confusion for professionals who need to apply them on a daily basis?

CPAs Are Unique Gatekeeping Professionals

The most critical question facing accounting professionals today is how to define ourselves in society. What is our raison d’être as CPAs? Are we protectors of the public trust—as George May of Price Waterhouse and Robert Montgomery of Coopers & Lybrand (and president of the NYSSCPA) envisioned 85 years ago? Are we the gold standard trusted advisor in service to our clients? Are the two goals mutually exclusive—is it our responsibility to serve our clients or the public? We hope to add some clarity and debate to this issue going forward, as well as to unveil the cultural norms shared equally by professionals, regulators, and the public.

We begin by introducing our readers to our role as “gatekeeper,” a term that may be unfamiliar to many. Our readers may remember my last editorial, which referenced a perspective on financial fraud penned by John Coffee, a distinguished Columbia University law and corporate governance professor. Coffee focused on three gatekeeping professions: auditor, attorney, and securities analyst.

According to Coffee, gatekeepers are licensed professionals who owe their credibility and reputation to qualities that legal scholars call “reputational capital”—independence, impartiality, and fairness. In the accounting literature, however, “gatekeeping profession” was not commonly used to refer to CPAs, although Coffee introduced it in his 2000 testimony before the SEC. I can find no reference to it in more than 2,800 pages of the PCAOB's professional standards. Coffee argues our critical importance to U.S. capital markets, despite the fact that financials are the responsibility of management: The premise should be made explicit; corporate governance does not work, nor can management be held accountable, in the absence of a system that makes gatekeepers reasonably faithful to the interests of the investors.

As CPAs, we hold the most critical and unique role in protecting the integrity of our capital markets (Vincent J. Love, “Auditor's Responsibility for Detecting Fraud,” The CPA Journal, June 2012, p. 33). No other independent force in the capital markets is as powerful. If the system were to falter, no government institution or regulatory entity could replace it. Public accountants are the institutional power whose responsibility is to ensure the accuracy of financial statements, the bedrock of investor confidence. We are the gatekeepers of the capital markets.

Today, however, our gatekeeping responsibilities are under assault. In late 2013, SEC Enforcement Director Andrew Ceresney announced a major new initiative directed towards accounting firms, “Operation Broken Gate.” Incidentally, Ceresney was a former appellate attorney for the SEC Regional NY Office, which focused on major crimes and securities fraud. In Broken Gate, Ceresney declared that the SEC is engaged in a ongoing effort to hold gatekeepers accountable (SEC Press Release 2013-207, “SEC Charges Three Auditors in Continuing Crackdown on Violations or Failures By Gatekeepers,” http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539850572#.VLQ_6Vp5jGu). About three months ago, at the American Law Institute's Accountants Liability Conference, a team of attorneys from Arnold & Porter LLP reported that the objective of the SEC's Division of Enforcement was to focus on accounting fraud and auditors. And SEC Chief Accountant James Schnurr's recently chastised the PCAOB, for not moving “quickly enough to enact new rules on how auditors do their jobs” (“SEC: Accounting Board Is Dragging Feet,” by Michael Rapoport, Wall Street Journal, December 14, 2014).

It is indisputable that our profession is at its crossroads. In the eyes of many, our response to the assault has been silence. Last year, I was surprised that one little-discussed article, “The History of the Decline and Fall of the American Accounting Profession” (William Dennis Huber, International Journal of Economics and Accounting, vol. 4, pp. 365–388, 2013) received no credible response. New York Times best-selling author Brigitte Gabriel reminds us that the peaceful majority is irrelevant. In 2015, we need to respond, to stand as a profession, and to position our response appropriately. We will need to improve results from within and challenge the detractors from outside, to provide a positive response, meaningful dialogue, and self-reflection. The Journal will help serve as the voice of our profession and provide a forum for open debate.